Note that projecting both the revenues of a wealth tax and a future wealth tax of any individual is difficult to impossible. In the case of the three individuals with the top net worth in California, the per share values of their companies have fallen precipitously since AB 259 was proposed on Jan. 19, 2023.
In 2024 and 2025, these three California billionaires would be expected to pay roughly 39 percent of the projected wealth tax revenues as the law phases in; thereafter, the three would pay roughly only 19 percent of the projected tax revenues.
Over the first decade of the proposal, Larry Page (Alphabet/Google), Sergey Brin (Alphabet/Google), and Mark Zuckerberg (Meta) are forecasted to pay the State of California some $40+ billion in new wealth taxes plus their continuing income taxes. They would also need to pay California and federal income taxes on the sale of assets they would need to sell to pay the wealth tax. With the additional federal and California income taxes, the total additional taxes in the first decade for these three individuals could easily exceed $60 billion.
What could possibly go wrong?
Apparently, the California legislature has forgotten that Elon Musk already departed California to become a resident of Texas.
Nevada’s South Lake Tahoe is beautiful and is less than 200 miles from San Francisco. It’s a spectacular place to be a resident. Winter months can be spent anywhere other than California. The result: No California wealth tax.
California should be very wary of the unintended consequences of a new wealth tax. Whenever any of the current wealthy Californians leave California, California loses its current California income taxes. If wealthy residents flee California, it isn’t impossible that the proposed wealth tax would result in a reduction of total California taxes.
There are a few studies that indicate that wealthy individuals generally don’t tend to move from their state of residence as the result of increases in taxes. However, none of those studies contemplate new taxes in total dollars or percentages for any individual of nearly the magnitude of the proposed California wealth tax.
California’s proposed wealth tax on part-time and temporary residents is based on the percentage of time spent in California. A “temporary resident” is an individual who is in California for more than 31 days during any year.
Bill Gates purchased a vacation home in Palm Desert almost 20 years ago. Assuming his taxable net worth hovers around $100 billion, on Gates’s 32nd day in California, he could owe $125 million in California wealth taxes with an additional $4 million in wealth taxes for each day thereafter. He would also become responsible for reporting to California authorities by April 15 of each year the fair market value of each of his worldwide assets and liabilities.
It would be unlikely that any super wealthy non-California resident would consider continuing to own or purchase a vacation home in California if such ownership subjected them to wealth taxes based upon 100 percent of their assets. Areas such as Palm Desert or the California side of Lake Tahoe could see significant reductions in home values with an accompanying reduction in local property taxes.
California also proposes to continue to subject California residents to the proposed wealth tax for four years after they leave California. Taxpayers and their lawyers would have to fetch their copies of the federal constitution and watch while federal courts determine if it’s constitutional to tax a resident of another state on assets held in that other state.
The general information and the appraisal requirements of the proposed wealth tax are staggering. These rules start with each wealthy taxpayer (including temporary residents) reporting in detail their worldwide assets and liabilities.
The reporting would require the “separate” reporting of each individual asset. For each individual investment in non-public entities, the taxpayer would be responsible for reporting the percentage ownership plus book value and book profits of the entity under generally accepted accounting principles.
In concert with the above, every non-publicly traded business entity except sole proprietorships doing business or registered in California would be required to supply California with the names, addresses, and taxpayer identification numbers of all owners regardless of whether they are California residents. Entities would need to provide the percentage ownership and book value and book profits, both according to generally accepted accounting principles. (One notes that generally accepted accounting principles are not universally used around the world.)
With the information above, there are formulas for calculating the taxpayer’s value in each entity; these formulas are generic and would value some companies at multiples of their true fair market value and in other cases tiny percentages of their fair market value. Taxpayers could alternatively use “certified appraisals.” At that point, the costs become prohibitive and the law becomes extraordinarily complicated.
The costs of the valuation process and the lack of privacy in themselves would cause individuals and businesses to leave California and never return.
In one of the more bizarre parts of the calculation of the proposed wealth tax, real estate directly held would be exempt from the wealth tax. Real estate indirectly owned would result in a credit against the wealth tax for property taxes paid on the real estate. Ignoring the proposal language regarding the calculation thereof (a classic mixing of valuation concepts), to claim the credit, the taxpayer would need for each property fair market value, assessed value, property taxes paid, and offsetting mortgages. Would any large international entity be able or willing to produce this information? Probably not.
A California wealth tax at first blush may appear to be an opportunity for the California legislature to cash in on wealthy Californians’ wealth. Alas, taxpayers choose California; California doesn’t get to force people to live in California. Many wealthy taxpayers would rather leave California alone or with their businesses than face the complexity of the tax, the compliance costs of the tax, and the dollars necessary to pay the tax.
